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By: 1. Kenneth A.

Kim
John R. Nofsinger
And
2. A. C. Fernando



3
rd
Lesson
A & A are important part of any corporate
monitoring system.
Accountants keep tracks of financial
information and auditors make a review and
monitor.
Information can only be obtained by auditors.
Banks, creditors and other rely on these
statement to the firms accurate picture and
financial health.
Good for the investors to assess the value of
the company.


Accounting Functions

Gathering, compiling, reporting, and
archiving a firms business activities.

Accounting information helps making
decision
either for insiders
or outsiders.


Accounting for Inside Use

Managers use these information to measure
the progress toward their goals and highlight
any potential problems in advance
E.g. Managers wants to know their products sales
situation.
How to manage the inventory.
What about cash
Have the firm enough cash to pay its upcoming
debt payments?


Accountants answer these Qs with;

Budgets
Variance reports
In business, a variance report is prepared to evaluate the operating
efficiency of different aspects of (usually) a manufacturing company.

Sensitivity analyses
A technique used to determine how different values of an
independent variable will impact a particular dependent variable under a
given set of assumptions.

Revenue reports
Daily
Monthly

Cost projections and
Cost estimates (five years, less or more)
Even analysis of competitors
Accounting for Outside Use

Who are outsiders for a firm

Investors
Banks
The government
Other stakeholders


Difference between financial accounting and
managerial accounting

provide information to two different user groups.

Financial accounting primarily provides information
for external users of accounting data, such as investors
and creditors.

On the other hand, management accounting provides
information for internal users of accounting data.
Internal users include employees, managers, and
executives of the company.

Financial statement can be explained
through;

Income statement
Balance Sheet
Statement of Cash Flow
Popular press articles
And analysts recommendations
Thats how outsiders can easily determine the
firms value, profit and its risk.

However, SEC is looking for the uniform set
of standards for public companies i.e. GAAP
(Generally Accepted Accounting Principles).

These statements are prepared by the
accountants of the firms and reviewed by the
independent accountants from an auditing
firm.
Accounting records are different for;
The managers
Public financial statements
And the IRS.

Problems That May Occur In Accounting
Unintentional Errors
Problems with receivables
Intentional Errors
Overstate income statement
Understate liabilities
Overstate assets (receivables)

Who are responsible
Accountants
Managers
Auditing
The general definition of an audit is an
evaluation of a person, organization, system,
process, enterprise, project or product. The
term most commonly refers to audits in
accounting, but similar concepts also exist in
project management, quality management,
and energy conservation.

Audits are performed to ascertain the validity
and reliability of information.
Internal Auditor
Internal auditor is responsible;
To oversee the firms financial and operating
procedures
To check the accuracy of the financial record-
keeping
To implement improvements with internal control
To ensure compliance with accounting regulations
And to detect fraud.

Firms are not required to have internal
auditors but many firms have them to
enhance their accounting and internal control
efficiency.

In fact, the people who initially detected
financial fraud at WorldCom were the
companys own internal auditors.
External Auditor

External auditors are the accountants from
outside the firms

They review;
The firms financial statements
The fairness of the statement
Assess the system and procedure used by internal
auditors
To conduct external audit, the auditors
might;
Conduct interviews with the firms employees to
assess the quality of the internal audit system.
Make their own observations of the firms assets.
Check sample balance sheet transactions
Meeting with the firms customers and clients to
assess the firms short-term assets and liabilities.
Conduct their own financial statement analysis such
as comparing ratios from one period to the next.
In the end they generate the report.
largest accounting firms are;
(BIG FOUR)
Prince Waterhouse Coopers (HO in UK)
Deloitte & Touche (HO in US)
Ernst & Young (Ho in UK)
KPMG (HO in Netherland)
The Changing role of Accounting Managing
Earnings
Accountants role has been changed for the
last two decades i.e
Instead of simply providing information to insiders
and outsiders, accountants act as a profit- centers.

Instead of simply reporting to quarterly profits of
the firms, accountants ask to increase profits
through application of accounting methods. (P.32


From Manipulation to Fraud

A question often asked is how much can
companies manipulate accounting figures before
they cross the line into fraud?
E.g. Selling goods/assets at high price to its own
subsidiary, where as the book value is very low and so
on.
Accountants are under pressure from the
management side;
To show maximum profit by any mean
To show less shortfalls

What about the investors?
There is a difference between capital
investment and operating expenses e.g. On
June 25, 2002, WorldCom disclosed that
roughly $3.8 billion had been improperly
booked as capital investments instead of
operating expenses.

There is a clear line between legal accounting
manoeuvring and accounting fraud.
Auditors as Consultants
Business consulting firms typically advice firms
on tactical issues, such as how to enter a new
market and strategic issues, such as acquiring or
spinning off other firms.

For example, McKinsey & Company
Advises more than half of the Fortune 500 firms
7,700 consultants in 84 locations worldwide and
generated $3.4 billion revenue
Representing more than 40 percent market share of the
consulting business.


One potential problem for a firms
shareholders occur when a consulting firm
conducts auditing services for the company.

The income for conducting an audit is far
lower than the fees earned for consulting.
Summary
Accountants keep tracks of the firms
financial records.
Internal and external auditors review the
records.
Therefore, auditors are an important part of
the governance system.
Aside from keeping financial records, they are
asked to manage earnings to meet internal
and external targets.
They know the line between figure
manipulation and fraud.
The share holders interest is always
neglected.
Consultants and auditors job should be
different.
The End

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